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MCRI > SEC Filings for MCRI > Form 10-K on 14-Mar-2014All Recent SEC Filings

Show all filings for MONARCH CASINO & RESORT INC

Form 10-K for MONARCH CASINO & RESORT INC


14-Mar-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Monarch Casino & Resort, Inc., through its direct and indirect wholly-owned subsidiaries, Golden Road Motor Inn, Inc. ("Golden Road"), Monarch Growth Inc. ("Monarch Growth"), Monarch Black Hawk, Inc. ("Monarch Black Hawk"), High Desert Sunshine, Inc. ("High Desert") and Golden North, Inc. ("Golden North"), and Golden East, Inc. ("Golden East") owns and operates the Atlantis Casino Resort Spa, a hotel/casino facility in Reno, Nevada (the "Atlantis"); the Monarch Casino Black Hawk (formerly named Riviera Black Hawk Casino) in Black Hawk, Colorado ("Black Hawk"); and real estate proximate to the Atlantis and Monarch Casino Black Hawk.

Monarch's wholly owned subsidiary Monarch Interactive, Inc. ("Monarch Interactive") received approval from the Nevada Gaming Commission on August 23, 2012, which approval was extended three times, each for an additional six month period, with the most recent approval received on February 20, 2014, pending commencement of operations, for a license as an operator of interactive gaming. Before the license can be issued, a number of conditions must be met and before operations can commence, the Company must enter into contracts with a licensed interactive gaming service provider with an approved system. None of these conditions have occurred, and Monarch Interactive is not currently engaged in any operating activities. In Nevada, legal interactive gaming is currently limited to intrastate poker.

Our operating assets are the Atlantis and the Monarch Black Hawk. Our business strategy is to maximize revenues, operating income and cash flow primarily through our casino, food and beverage operations and at the Atlantis, our hotel operations. The Monarch Black Hawk does not yet have a hotel. We focus on delivering exceptional service and value to our guests. Our hands-on management style focuses on customer service and cost efficiencies.

Unless otherwise indicated, "Monarch," "Company," "we," "our" and "us" refer to Monarch Casino & Resort, Inc. and its subsidiaries.

OPERATING RESULTS SUMMARY

Our operating results may be affected by, among other things, competitive factors, gaming tax increases, the commencement of new gaming operations, construction at our facilities, general public sentiment regarding travel, overall economic conditions and governmental policies affecting the disposable income of our patrons and weather conditions affecting our properties, as well as those matters discussed in "Item 1A. Risck Factors" above. In particular, our results for the year ended December 31, 2012 were impacted by non-recurring expenses in connection with the acquisition of Monarch Black Hawk, Inc. Consequently, our operating results for the year are not necessarily comparable and may not be indicative of future periods' results.

The following significant factors and trends should be considered in analyzing our operating performance:


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Atlantis: As in many other areas around the country, the northern Nevada market continues to be impacted by the economic decline which began in the fourth quarter of 2007. Since that time, aggressive marketing programs by our competitors have also posed challenges to us. While recent statistics released by the Nevada Gaming Control Board have shown growth in northern Nevada and in the Reno/Sparks gaming market for the year ended December 31, 2013 compared to the same period in 2012, we anticipate that the unstable macroeconomic climate nationally and in the northern Nevada, combined with aggressive marketing programs of our competitors, will continue to apply pressure on Atlantis revenue. Despite this, in 2013, Atlantis revenue in all categories increased compared to 2012.

Monarch Black Hawk: Since the acquisition of Monarch Black Hawk, Inc. in April 2012, our focus has been to maximize casino and food and beverage revenues. There is currently no hotel on the property. We have evaluated all aspects of operations and have implemented certain operational changes which we believe will enhance the guest experience while also reducing costs. In September 2013, we opened our new buffet, which was an important step in our ongoing process of redesigning and upgrading the existing Monarch Black Hawk facility. On April 10, 2013, we received zoning approval for our master expansion plan, subject to certain conditions, from the Black Hawk City Council. The approved master plan, once completed, would nearly double the existing casino space and would convert the facility into a full-scale, high end, resort through the addition of a 22-story hotel tower with 507 guest rooms and suites, an upscale spa and pool facility, four restaurants, additional bars, associated support facilities and a new ten story parking structure that, together with existing parking, would provide 1,551 parking spaces. Once the detailed design and construction plans are completed, we intend to finalize the cost estimate and construction timeline for the expansion project and secure necessary financing. Our decision to proceed on this project will be subject to many of the factors set forth under "Item 1A. Risk Factors".

RESULTS OF OPERATIONS

Comparison of Operating Results for the Twelve Months Ended December 31, 2013 and 2012

For the year ended December 31, 2013, our net income totaled $18.0 million, or $1.06 per diluted share, an increase of $9.0 million, or 102%. Net revenues totaled $188.7 million for the twelve months ended December 31, 2013, an increase of $25.4 million or 15.6% over the same period in 2012. Income from operations for the twelve months ended December 31, 2013 totaled $30.5 million compared to $16.0 million for the same period in 2012 representing an increase of $14.5 million or 91%.

Atlantis Operations:

For the year ended December 31, 2013, net revenue increased to $141.2 million from $133.6 million for the same period of 2012, approximately $7.6 million or 5.7%, due to higher revenue in each revenue category and slightly lower promotional allowances ("Complimentaries").

Casino revenue increased primarily due to higher slot revenues and higher table games revenue. Casino operating expenses as a percentage of casino revenue decreased to 41.5% as compared to 43.3% in the prior year primarily due to the revenue increase.


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Food and beverage revenue increased 3.7% during the year driven by a 2.6% increase in covers served combined with a 1.0% increase in the average revenue per cover. This increase in covers served was the result of continuing improvement in the quality food offerings. Food and beverage operating expenses as a percentage of food and beverage revenue increased from 41.8% in the prior year to 42.9% for the current year due primarily to increased payroll and related expenses.

Hotel revenue increased 12.3% due to higher average daily room rate ("ADR") of $77.78 in 2013 compared to $71.13 in 2012 and higher hotel occupancy of 89.5% during 2013 compared to 87.2% during 2012. Revenue per Available Room ("REVPAR"), calculated by dividing total room revenue (less service charges, if any) by total rooms available was $75.41 and $66.98 for the years ended December 31, 2013 and 2012, respectively. Hotel operating expenses as a percent of hotel revenues improved slightly to 27.1% in 2013 as compared to 27.3% for the comparable prior year period due to the higher revenue partially offset by higher payroll and related expenses and higher travel commission operating expenses.

Promotional allowances as a percentage of gross revenues decreased to 18.1% during 2013 from 19.1% during 2012. This decrease was primarily the result of increased revenue and modified utilization of the promotional programs.

Monarch Black Hawk Operations:

We acquired Monarch Black Hawk on April 26, 2012, and therefore, Black Hawk's results for the year ended December 31, 2012 reflect its operations only for the period subsequent to its acquisition. As such, the results for the year ended December 31, 2013 are not comparable to 2012 which reflects only partial year results. The amounts of net revenue and operating income of Monarch Black Hawk included in the Company's consolidated statement of income, after elimination of intercompany transactions, for the year ended December 31, 2013 and 2012 (reflecting only operations since April 26, 2012) are as follows:

Amounts in millions

                           Twelve months ended December 31,
                               2013                 2012
Net revenue              $           47.5     $           29.7
Income from operations   $           11.6     $            6.3

Corporate and other:

Selling, general and administrative expense ("SG&A Expense") for 2013 increased by $4.3 million, or 9.0%, compared to prior year. $3.2 million of this increase represents SG&A Expense from the Monarch Casino Black Hawk operation for the period beginning January 1, 2013 through April 26, 2013 for which the prior year reflects no expense (Monarch Black Hawk was acquired on April 26, 2012). The primary drivers of the remaining $1.1 million increase in SG&A Expense are:
higher payroll and related taxes and benefits expense of $1.6 million, higher professional fees by $0.5 million, and higher utility expense by $0.1 million partially offset by a $1.1 million decrease in use tax expense on complimentary meals as a result of the State of Nevada Department of Taxation ruling, which affected the entire Nevada hotel-casino industry, that complimentary and employee meals were no longer subject to taxation.


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Depreciation and amortization expense slightly decreased to $16.6 million for the year ended December 31, 2013 as compared to $16.7 million for the year ended December 31, 2012 as a result of the decrease in depreciation expense for Atlantis property due to assets from 2008 Atlantis expansion being fully depreciated by July 2013 and partially offset by the increase in depreciation expense for Black Hawk property due to the fact that 2013 represents a full year of Monarch Black Hawk depreciation and amortization expense while 2012 represents depreciation and amortization expense for the period only after the acquisition (we acquired the Riviera Black Hawk on April 26, 2012).

During 2012, we incurred $2.2 million of non-recurring acquisition expenses, comprised primarily of professional fees, directly related to the acquisition of Monarch Black Hawk. No such expenses were incurred in the current year.

During the year, the Company paid down the principal balance on its credit facility by $27.3 million, which decreased the outstanding balance of the credit facility to $53.8 million at December 31, 2013 from $81.1 million at December 31, 2012. Interest expense decreased to $1.9 million in the year 2013 from $2.0 million in the year 2012 as a result of a lower loan balance combined with lower interest rates on our credit facility driven by our lower leverage ratio. See further discussion of our credit facility in the LIQUIDITY AND CAPITAL RESOURCES section below.

Comparison of Operating Results for the Twelve Months Ended December 31, 2012 and 2011

Atlantis Operations:

For the year ended December 31, 2012, net revenue decreased slightly to $133.6 million from $134.5 million for the same period of 2011, approximately $905 thousand or 0.7% as a result of higher promotional allowances due to an increase in the amount of complimentary food, beverage and other services provided to casino patrons ("Complimentaries") partially offset by the higher casino, food and beverage and other revenues.

The increase in casino revenue was primarily due to higher table games revenue. Casino operating expenses as a percentage of casino revenue increased slightly to 43.3% as compared to 42.6% in the prior year primarily due to the cost of the higher Complimentaries, partially offset by higher casino net revenue.

Food and beverage revenues increased 1.6% during the year driven by a 3.0% increase in the average revenue per cover partially offset by a 1.3% decrease in covers served. The increase in the average revenue per cover was the result of menu price increases in response to higher food commodity costs. These menu price increases contributed to an improvement in the food and beverage operating expenses as a percentage of food and beverage revenue from 44.8% in year 2011 to 41.8% for the year 2012.

Hotel revenue decreased 5.8% due to lower average daily room rate ("ADR") of $71.13 in 2012 compared to $74.22 in 2011 and lower hotel occupancy of 87.2% during 2012 compared to 89.1% during 2011. Revenue per Available Room ("REVPAR"), calculated by dividing total room revenue (less service charges, if any) by total rooms available was $66.78 and $71.05 for the years ended December 31, 2012 and 2011, respectively. Hotel operating expenses as a percent of hotel revenues increased slightly to 27.3% in 2012 as compared to 27.2% for the comparable prior year period due to lower revenues.

Promotional allowances as a percentage of gross revenues increased to 19.1% during 2012 from 17.8% during 2011. This increase was primarily the result of increased promotional and discount programs in response to the challenging economic environment and ongoing competitor promotional and discount programs.


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Monarch Black Hawk Operations:

We acquired Monarch Black Hawk on April 26, 2012, and therefore, no information is provided for the year ended December 30, 2011. The amounts of net revenue and operating income of Monarch Black Hawk included in the Company's consolidated statement of income, after elimination of intercompany transactions, for the year ended December 31, 2012 are as follows (in millions):

Net revenues $ 29.7
Income from operations $ 6.3

Corporate and Other:

Selling, general and administrative expense ("SG&A Expense") for 2012 increased by $8.0 million over the prior year, $6.6 million of which represents SG&A Expense from the Black Hawk operation for which the prior year reflects no expense. The primary drivers of the remaining $1.4 million of increased Atlantis and Monarch Corporate SG&A Expense are: higher use tax expense of $0.7 million, higher salaries and benefits of $0.6 million and higher marketing and advertising expenses of $0.6 million, partially offset by lower utilities of $0.3 million and lower license fees of $0.2 million. The higher use tax expense is primarily the result of a ruling from the Nevada Department of Taxation that complimentary meals are subject to use tax effective February 2012. Following Nevada casino industry practice, the Company did not recognize use tax on complimentary meals in the prior year. Note that this ruling was subsequently reversed by the Nevada Department of Taxation in the second quarter of 2013.

Depreciation and amortization expense increased to $16.7 million in the year ended December 31, 2012 as compared to $13.4 million for the year ended December 31, 2011 primarily due to depreciation and amortization expense related to the addition of Monarch Black Hawk.

During 2012 and 2011, we incurred $2.2 million and $1.0 million, respectively, of non-recurring acquisition expense directly related to the acquisition of Monarch Black Hawk.

In the third quarter of 2011, the Company incurred a $3.5 million one-time, non-cash charge related to the demolition of a free standing building on a parcel it owns near the Atlantis.

Because of borrowings required to complete the Monarch Black Hawk acquisition, the balance outstanding under our Credit Facility increased from $24.7 million at December 31, 2011 to $81.1 million at December 31, 2012. As a result, interest expense increased to $2.0 million in 2012 from $914 thousand in 2011 (see "THE CREDIT FACILITY" below).

CAPITAL SPENDING AND DEVELOPMENT



We seek to continuously upgrade and maintain our facilities in order to present
a fresh, high quality product to our guests.  Capital expenditures during the
years ended December 31, 2013 and 2012 were as follows:



                             2013           2012
Capital Expenditures:
Atlantis                 $  3,813,593   $  3,530,254
Monarch Black Hawk (a)      8,586,872      6,798,661
                         $ 12,400,465   $ 10,328,915



(a) We acquired Monarch Black Hawk on April 26, 2012.


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During the twelve months ended December 31, 2013 and 2012, capital expenditures at both the Atlantis and Monarch Black Hawk consisted primarily of the acquisition of gaming equipment to upgrade and replace existing equipment and other general upgrades to their respective facilities. In addition in 2013 at Black Hawk, as a part of our continuing effort since the acquisition to redesign and upgrade the property, capital expenditure were made for the new buffet, remodeling of restrooms and temporary casino area to mitigate disruption as we upgrade other portions of the casino floor.

Future cash needed to finance ongoing capital expenditures and the ongoing redesign and upgrade of the Black Hawk property, is expected to be available from operating cash flow, the Credit Facility (see "THE CREDIT FACILITY" below) and, if necessary, additional borrowings.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We prepare our consolidated financial statements in conformity with accounting principles generally accepted in the United States. Certain of our policies, including the estimated useful lives assigned to our assets, the determination of the allowance for doubtful accounts, self-insurance reserves, the calculation of income tax liabilities and the calculation of stock-based compensation, require that we apply significant judgment in defining the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. Our judgments are based on historical experience, terms of existing contracts, observation of trends in the industry, information provided by customers and information available from other outside sources, as appropriate. There can be no assurance that actual results will not differ from our estimates. To provide an understanding of the methodologies applied, our significant accounting policies are discussed where appropriate in this discussion and analysis and in the Notes to Consolidated Financial Statements.

The consolidated financial statements include the accounts of Monarch and its subsidiaries. Intercompany balances and transactions are eliminated.

Allowance for Doubtful Accounts

The Company extends short-term credit to its gaming customers. Such credit is non-interest bearing and is due on demand. In addition, the Company also has receivables due from hotel guests which are primarily secured with a credit card at the time a customer checks in. An allowance for doubtful accounts is set up for all Company receivables based upon the Company's historical collection and write-off experience, unless situations warrant a specific identification of a necessary reserve related to certain receivables. The Company charges off its uncollectible receivables once all efforts have been made to collect such receivables. The book value of receivables approximates fair value due to the short-term nature of the receivables.

Self-insurance Reserves

We are currently self-insured up to certain stop loss amounts for Atlantis workers' compensation and certain medical benefit costs provided to all of our employees. As required by the state of Colorado, we are fully-insured for Black Hawk workers' compensation costs. The Company reviews self-insurance reserves at least quarterly. The reserve is determined by reviewing the actual expenditures for the previous twelve-month period and reports prepared by the third party plan administrator for any significant unpaid claims. The reserve is an amount estimated to pay both reported and unreported claims as of the balance sheet date. We believe changes in medical costs, trends in claims of our employee base, accident frequency and severity and other factors could materially affect the estimate for this reserve. Unforeseen developments in existing claims, or the possibility that our estimate of unreported claims differs materially from the actual amount of unreported claims, could result in the over or under estimation of our self-insurance reserve.


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Capitalized Interest

The Company capitalizes interest costs associated with debt incurred in connection with major construction projects. When no debt is specifically identified as being incurred in connection with a construction project, the Company capitalizes interest on amounts expended on the project at the Company's average borrowing cost. Interest capitalization is ceased when the project is substantially complete. The Company did not capitalize interest during the years ended December 31, 2013, 2012 and 2011.

Casino Revenues

Casino revenues represent the net win from gaming activity, which is the difference between wins and losses. Additionally, net win is reduced by a provision for anticipated payouts on slot participation fees, progressive jackpots and any pre-arranged marker discounts. Progressive jackpot provisions are recognized in two components: 1) as wagers are made for the share of player's wagers that are contributed to the progressive jackpot award and 2) as jackpots are won for the portion of the progressive jackpot award contributed the Company.

Promotional Allowances

Our frequent player program allows members, through the frequency of their play at the casino, to earn and accumulate points which may be redeemed for a variety of goods and services ("Complimentaries"). Points may be applied toward hotel room stays, food and beverage consumption at the food outlets, gift shop items as well as goods and services at the spa and beauty salon and for cash in our Black Hawk property. Points earned may also be applied toward off-property events such as concerts, shows and sporting events.

We recognize Complimentaries expense at the time points are earned, which occurs commensurate with casino patron play. The amount of expense recognized is based on the estimated cost of the Complimentaries expected to be redeemed.

The retail value of hotel, food and beverage services provided to customers without charge is included in gross revenue and deducted as promotional allowances. The cost of the products and services earned is reported as casino operating expense.

Income Taxes

Income taxes are recorded in accordance with the liability method pursuant to authoritative guidance. Under the asset and liability approach for financial accounting and reporting for income taxes, the following basic principles are applied in accounting for income taxes at the date of the financial statements:
(a) a current liability or asset is recognized for the estimated taxes payable or refundable on taxes for the current year; (b) a deferred income tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences and carryforwards; (c) the measurement of current and deferred tax liabilities and assets is based on the provisions of the enacted tax law; the effects of future changes in tax laws or rates are not anticipated; and (d) the measurement of deferred income taxes is reduced, if necessary, by the amount of any tax benefits that, based upon available evidence, are not expected to be realized.


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Our income tax returns are subject to examination by tax authorities. We assess potentially unfavorable outcomes of such examinations based on accounting standards for uncertain income taxes. Under the accounting guidance, we may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than 50.0% likelihood of being realized upon ultimate settlement. It also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods and disclosure. The liability for unrecognized tax benefits is included in current and noncurrent tax liabilities, based on when expected to be recognized, within the consolidated balance sheets at December 31, 2013 and 2012.

Stock-based Compensation

We account for stock-based compensation in accordance with authoritative guidance which establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods and services or incurs a liability in exchange for goods and services that are based on the fair value of the entity's equity instruments or that may be settled by the issuance of those equity instruments. It requires an entity to measure the costs of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award and recognize that cost over the service period. We calculate the grant-date fair value using the Black-Scholes valuation model.

The Black-Scholes valuation model requires the input of highly subjective assumptions which include the expected term of options granted, risk-free interest rates, expected volatility, and expected rates of dividends. We estimate an expected term for each stock option grant based on the weighted-average time between grant date and exercise date and the risk-free interest rate assumption was based on U.S. Treasury rates appropriate for the expected term. We use historical data and projections to estimate expected volatility and expected employee behaviors related to option exercises and forfeitures.

Fair Value of Financial Instruments

The estimated fair value of the Company's financial instruments has been determined by the Company, using available market information and valuation methodologies. However, considerable judgment is required to develop the estimates of fair value; thus, the estimates provided herein are not necessarily indicative of the amounts that the Company could realize in a current market exchange.

The carrying amounts of cash, receivables, accounts payable and accrued expenses approximate fair value because of the short-term nature of these instruments. Additionally, the carrying value of our long-term debt approximates fair value due to the variable nature of applicable interest rates and relative short-term maturity.

Goodwill

The Company accounts for goodwill in accordance with ASC Topic 350, Intangibles-Goodwill and Other ("ASC Topic 350"). ASU . . .

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